Hedge funds are holding a near-record bullish position in crude oil and refined fuels but the buying seems to have run out of momentum and is increasingly concentrated only in Brent.
Hedge funds and other money managers increased their net long position in the six most important futures and options contracts linked to petroleum by 12 million barrels in the week to April 10.
The net long position has increased by 149 million barrels over the last four weeks to 1.365 billion barrels.
Net length across the petroleum complex is only 118 million below the record of 1.484 billion set on Jan. 23.
But the increasing bullishness is becoming more selective and is almost entirely concentrated in Brent, according to an analysis of position records published by regulators and exchanges.
Portfolio managers increased their net long position in Brent by 17 million barrels in the week to April 10 and have raised net length by a total of 48 million barrels since Jan. 23.
By contrast, the net long position in WTI was cut by 3 million barrels last week and is down by 108 million barrels since Jan. 23.
Net positions in U.S. gasoline, U.S. heating oil
and European gasoil were cut or essentially unchanged in the most recent week (https://tmsnrt.rs/2EQ0vFd).
The result is an increasing divergence between Brent and WTI and to a lesser extent between Brent and refined fuels.
Portfolio managers now hold a record net long position of 632 million barrels in Brent, up from 584 million on Jan. 23.
Hedge fund long positions outnumber shorts in Brent by more than 20:1, up from a ratio of 11:1 back in January.
There are plenty of reasons to be bullish about crude prices, including strong growth in oil consumption, continued output restrictions by OPEC, disruption in Venezuela, and the threat of new sanctions on Iran.
OPEC members have indicated they want to see a further rise in oil prices to stimulate more upstream investment and may be targeting prices as high as $80 per barrel, up from just over $70 currently.
The latest position data refers to positions at the end of trading on April 10, before the United States and its allies launched air strikes on Syria in the early hours of April 14.
Rising political and military tensions across the Middle East, including in Syria and Yemen, have created a speculative bid for oil prices.
Nonetheless, hedge fund positioning in Brent has become exceptionally stretched and is a significant source of downside risk if and when fund managers try to realise some of their profits.
By John Kemp